Wednesday, March 27, 2013

How the Fed increases the cost of living

Is
the Fed’s QE program increasing food and fuel costs for consumers? Peter Kenny, managing director at Knight
Capital Group, thinks so. In an
interview with Breakout.com he stated that the Fed’s QE policy is pushing up
the price of fuel, which in turn raises the price for everything else in the
economy. While monthly headline inflation data is below the Fed's 2%
target, Kenny and many other market watchers see it showing up elsewhere “in
everything we assume is a part of our daily life.”

According
to Kenny, QE is pushing up the price by about 50% instead of the $65 a barrel
level where he believes it should be based on current supply and demand. Since the Fed is actively injecting more
money into the economy, he says that has resulted in “more dollars chasing that
fuel” leading to higher prices.

Kenny
also sees evidence of the Fed’s intervention in the stock market.“The soft bid
we see in equity markets and that we run into every time there’s a sell-off,
that soft bid is the direct result of quantitative easing.”

Few investors doubt the effects of the Fed’s stimulus efforts
in boosting oil and stock prices.
Without the impact of higher oil prices the effects of the deflationary
long-term cycle would be evident in every sector of the economy. What’s debatable is how it all ends. Will the Fed succeed in beating the 120-year
deflationary cycle scheduled to end in 2014 with its QE policy? Or will the structural forces of deflation
prevail despite the Fed’s strongest efforts as we head closer to the final
bottom of the cycle?

Mr. Kress himself always believed that while stimulus could
temporarily soften the blow of the cycle, no amount of central bank/government
intervention could ultimately stop the Master Cycle of
inflation/deflation. It’s too early to
say with any certainty that Kress was wrong but we’ll at least have a better
idea just how power the Fed has over the market once we see the market’s
reaction to the upcoming quarterly cycle peak.